Hospitality trends. Observations from the EY Miami Hospitality Sector Roundtable

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1 Hospitality trends Observations from the EY Miami Hospitality Sector Roundtable

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3 About this report In Q4 2017, EY surveyed South Florida hospitality sector leaders and invited these individuals to a roundtable, held on 8 November 2017, to discuss the survey results, as well as relevant industry trends. Our survey and discussions focused on the economy, transactions, capital markets, operating strategy and, more broadly speaking, industry disruptors (i.e., technology, shared economy platforms) affecting not only the South Florida market but also the US, Caribbean and Latin American hotel markets. The results of the survey are represented in the charts on the following pages. All respondent and participant names are confidential, and their responses were used only in combination with others to maintain their anonymity. EY would like to thank the individuals who took the time to complete the survey and attend EY s Miami, FL Hospitality Sector Roundtable. If you have questions about this survey or the EY Miami, FL Hospitality Sector Roundtable, please contact Michael Fishbin at michael.fishbin@ey.com, Mark Lunt at mark.lunt@ey.com or Robbie Karver at robert.karver@ey.com. Hospitality trends 2

4 Performance The US economy experienced gross domestic product (GDP) growth of 2.6% in the fourth quarter of 2017, 1 a decrease from 3.2% in the third quarter of 2017 but an increase from 2016 growth of 1.6%. 2 The Federal Open Market Committee estimates a median GDP growth of 2.1% and 2.0% for 2018 and 2019, respectively. 3 Meanwhile, the US lodging industry has experienced seven consecutive years of growth from 2010 to 2017, with an average annual RevPAR growth of 5.8%, according to Smith Travel Research (STR). Florida, the geographic focus for a large percentage of those in the room, observed a 7.5% annual growth rate from 2010 to What is your 2018 RevPAR growth estimate for the US? Greater than 3.0% 2.5% 3.0% 2.0% 2.5% 3% 20% 40% Less than 2.0% 37% 0% 10% 20% 30% 40% 50% The survey respondents forecast positive revenue per available room (RevPAR) growth, with 40% expecting growth to be between 2.0% to 2.5% and an additional 20% expecting growth to be between 2.5% to 3.0% for the US in This is consistent with the CBRE Hotel Horizons Forecast recent estimates of 2.5% in The average growth in RevPAR over the past 15 years ( ) was 3.4%. 5 During the past three years ( ), RevPAR growth has averaged 4.0% per year, with a significant increase shown from 2014 to 2015 of 5.9%. 6 Where are we currently in the lodging cycle? 2 years past peak 7% 1 year past peak 14% At peak 31% 1 US economic growth slows in fourth-quarter on surging imports, CNBC, 26 January year from peak 27% 2 National Income and Product Accounts Gross Domestic Product, Bureau of Economic Analysis, 29 November FOMC Projections, Board of Governors of the Federal Reserve System, 20 September Monthly Hotel Review, Smith Travel Research, 1 January years from peak 21% 0% 10% 20% 30% 40% 5 Table Monthly Hotel Review, Smith Travel Research, 19 January

5 Performance Almost a third of the survey participants believe weq3: are atwhich the peak of the following is the greatest macro threat Which of the following is the greatest macro of the cycle, while 48% believe the peak is still one to two years industry? lodging threat to the lodging industry? away and 21% believe the peak has past. Answered: 22 Skipped: 5 Based on the survey results, the greatest macroeconomic threat to the lodging industry is overbuilding and international instability (39% each). This is followed by the uncertainty surrounding the US federal government (10%), specifically the impact of tax reform, which was signed into law in late December Others to the 6% International instability 39% US federal government 10% Overbuilding (construction) 39% Rising interest rate(s) 6% 0% 10% 20% 30% 40% 50% Powered by If you re going to invest that next dollar, if you re going to enter into an M&A transaction, now it s cheaper to invest in the United States because the corporate rate is down; you will think more about making that incremental investment in the United States as opposed to somewhere else. - Mark A. Weinberger, Global Chairman and CEO of EY, CNBC, January 2018 Hospitality trends 4

6 Transactions Survey respondents are split on their expectations for transaction activity in 2018: 30% responded that they intend to develop, followed by 23% planning to hold and 20% planning to reinvest in 2018, while only 7% expect to adopt disposal strategies. As RevPAR continues to grow in the southeastern market, it appears that owners are more willing to develop and acquire additional properties. Other Hold Which of the following capital strategies will you prioritize over the next 12 months? 10% 23% Reinvest 20% Develop 30% Sell 7% Buy 10% 0% 10% 20% 30% 40% Moreover, over the next 12 months, responses from the survey indicate that the greatest pricing competition for hotel acquisitions is coming from international capital groups (29%) and by private equity (29%), followed by REITs (19%). Who do you expect to play the greatest role in acquiring hotels in the next 12 months? Unsure/not relevant to my business 13% Owners/operations 10% REITs 19% Valuation metrics Private equity 29% Fifty-nine percent of respondents surveyed believe that over the next 12 months, capitalization and discount rates will deteriorate. Foreign capital groups 29% 0% 10% 20% 30% 40% 5

7 Transactions According to EY s Hospitality Capital Conference Barometer 17th do you see Q7: What happening to capitalization and What do you see happening to capitalization anddiscount discount rates in the next months in South Edition (October 2017), a periodic survey of senior rates executives in the next months in South Florida? Florida? of large companies around the world, the top five hospitality Answered: 22 Skipped: 5 investment destinations in which respondents intend to pursue acquisitions are the US, China, United Kingdom, Germany and Deteriorating (i.e., increasing Australia, in that order. 59% and prices decreasing) Improving (i.e., decreasing and prices increasing) 10% Staying the same 31% 0% 20% 40% 60% 80% Powered by Considering the connection of the market cycle with investor strategies, a high percentage of survey respondents are currently holding assets to focus on strong cash flows (and, in some cases, refinancing), reinvesting with repositioning strategies or developing. This indicates that there s still some runway left in the market. The trade-off, however, is fewer transactions. Hospitality trends 6

8 Capital markets Forty-five percent of survey respondents believe debt and equity are easily available in South Florida, while 38% believe that neither debt nor equity is easily available. How would you characterize the availability of debt and equity capital in South Florida? According to EY s Hospitality Capital Confidence Barometer 17 th Edition (October 2017), capital markets remain open and supportive of companies growth strategies, and the majority of respondents had an optimistic outlook on the current capital market. On a global level, 99% of respondents anticipate corporate earnings to improve or remain stable in the near term; on the other hand, 86% of respondents expressed confidence in the short-term outlook for the capital markets and 94% expressed confidence in the equity valuations/stock market outlook. Neither debt nor equity available Debt and equity Only equity available 7% 38% 45% Only debt available 10% 0% 10% 20% 30% 40% 50% 7

9 Feedback among the attendants was that in today s South Florida market, there are good deals and bad deals; the focus needs to be on specific asset and submarket considerations. Buyers are mainly looking for an opportunity to create value from stagnant assets as the capital markets view Miami as slightly oversupplied. Miami, for example, missed its peak as 2015 and 2016 were affected by the Zika virus, as well as the lack of a convention center and new supply; sellers refuse to sell at current EBITDA multiples, but buyers refuse to price in future market stabilization growth. Hospitality trends 8

10 Supply and development The US hospitality market has been undergoing a significant supply increase in recent months. According to STR, the supply growth is anticipated to continue at 2.0% in 2018 and 1.9% in How do you view the impact of new hotel supply in Miami in the next few years? Miami is expected to continue its growth over the next few years, with 2,600 hotel rooms currently or soon to be in construction, including the Marriott Marquis Miami Worldcenter, Panorama Tower, Park-Line Towers at MiamiCentral, and SLS Lux. 7 Miami Beach is expected to add over 700 rooms, including the Greystone Hotel, Hotel Palomar South Beach, Fasano Miami Beach, Collins Park Hotel, 8 The Celino South Beach, and Palihouse Miami Beach. 9 Very significant Significant Somewhat significant 17% 23% 57% Not significant impact 3% 0% 10% 20% 30% 40% 50% 60% Low returns are the highest-referenced barrier to deal making among respondents at 32%, with high development costs being the second biggest challenge at 26%. In terms of development in South Florida, what has been your biggest challenge to get deals done? Unsure/not relevant to my business 13% Returns are not high enough 32% Declining market fundamentals 10% High development costs 26% High land costs 19% 7 Greater Downtown Miami Development Pipeline, Miami Downtown Development Authority, December new and upcoming hotels for Miami, Business Traveller, 15 January New South Florida Hotels We Can t Wait to Open, Miami Herald, 19 December % 10% 20% 30% 40% 9

11 Supply and development As hoteliers look to remain competitive, there has been a significant shift in focus directed toward lifestyle brands, including soft brands. Forty-two percent, however, believe the select-service brand segment is most ripe for investment in Which lodging product is most ripe for investment in 2018? Unsure/not relevant to my business 14% Luxury brands 6% Select-service brands 42% Lifestyle brands (including soft brands) 32% Big box brands 6% 0% 10% 20% 30% 40% 50% According to The Wall Street Journal, major online travel agents (OTAs) are increasing their home-rental inventory, with the goal of transforming vacation rentals into a hotel-like commodity, as well as providing travelers a comprehensive list of options for each destination. 10 For Miami, 36% of survey respondents noted that alternative lodging would have the most significant impact on future development, including Airbnb, Oasis and Serviced Apartments. This was followed by 25% of respondents citing natural disasters and rising sea levels and 21% citing competitive destinations. What challenges do you perceive to have the most significant impact on Miami s future hotel development? Competitive destinations Hotel alternatives (i.e., Airbnb, Oasis, Serviced Apartments Natural disasters/sea level rise 21% 25% 36% Lack of efficient public transportation/aging infrastructure 18% 0% 10% 20% 30% 40% 10 Expedia, Priceline Home In on Airbnb s Turf, The Wall Street Journal, 24 July Hospitality trends 10

12 Customer focus The primary customer focus in the hospitality industry are the Millennial and Gen X generations, as discussed during the roundtable. According to Forbes, Millennials spent an average of $4,500 on travel in 2017, representing an 8% increase from the previous year. 11 As brands compete for revenue from this generation of travelers, it is important to consider development details that Millennials value: authenticity, exclusivity, customized experiences, digital convenience and attention to design. 12 Roundtable participants noted that the Gen Z generation (those under the age of 18) have never experienced life without connectivity. As such, when planning for the future, market participants believe that connectivity will play an even greater role in a hotel experience than it does with Millennials. In addition to connectivity, the Gen Z generation is also anticipated to be more accepting of smaller spaces, supporting the current trends of urbanization, smaller and smarter living spaces, and micro-hotels. Which of the following customer segments are you most focused on in US brand and product development? Baby Boomers (age 52+) Gen X (age 36 51) Millennials (age 18 35) Gen Z (age < 18) 0% 8% 46% 46% 0% 10% 20% 30% 40% 50% Approximately 92% of the respondents selected the Millennials and Gen X equally as the customer segment of most importance, compared to 8% for Baby Boomers. 11 Why Millennials Are The Most Important Consumer Generation For The Travel Industry, Forbes, 8 November Travel Brands Shift Their Attention To The Millennial Market Forbes, 27 June

13 Industry focus Forty percent of survey respondents believe that the most effective method for attracting their respective customer segment is through design elements (i.e., common social spaces and efficient room design). What strategies do you believe are the most effective at attracting your target customer segment? Programming for social experiences comes in as the second most effective method for attracting 18- to 35-year-old travelers, just following the use of architecture and design. Perceived value Hosting social experiences 27% 33% Design elements 40% Use of technology 0% 0% 10% 20% 30% 40% 50% Based on the survey, respondents were asked for the most important contributing factor to guest satisfaction: service, value, product, consistency, experience/authenticity or other. Thirty-five percent of respondents believe experience/authenticity continues to be the most important factor, followed by value (29%). Which is the most important contributing factor to guest satisfaction? Other 0% Experience/authenticity 35% Consistency 3% Product 16% Value 30% Service 16% 0% 10% 20% 30% 40% Hospitality trends 12

14 Key considerations Competition for acquiring hotel assets, especially in gateway cities such as Miami, remains heavily driven by international capital in many instances, driving up values. Many industry players are turning to development as an alternative to acquisitions to enter new markets without overpaying for existing assets. The resulting shift to a development focus has resulted in many participants viewing oversupply and international instability as a threat to their own portfolios and the US lodging industry alike. In Miami, international visitation will continue to drive performance from markets such as Europe and Latin America. Attracting Millennial and Generation X travel demand, through the use of customized experiences and attention to design, should remain the focus. Though increases in interest rates, capitalization rates and discount rates are expected over the next 12 to 24 months, industry players are not necessarily looking at near-term disposal strategies. 13

15 Ernst & Young LLP contacts Michael Fishbin Principal Global and Americas Hospitality and Leisure Leader New York, NY Mark Lunt Principal Area Leader for the Southeast US, Latin America and the CaribbeanReal Estate, Hospitality and Leisure Miami, FL Robbie Karver Senior Manager Area Leader for the Southeast US, Latin America and the CaribbeanReal Estate, Hospitality and Leisure Miami, FL Ernst & Young LLP participants Kevin Benenfeld Senior Manager Real Estate, Hospitality and Leisure Miami, FL Camila Cote Miami Office Managing Partner Assurance Miami, FL Bruce Kaminsky Associate Director Real Estate, Hospitality and Leisure Philadelphia, PA Tom Brown Partner Assurance, Real Estate Atlanta, GA Steve Davis Partner Real Estate, Hospitality and Leisure Miami, FL Michael J. Magrans Principal Real Estate, Hospitality and Leisure New York, NY Norm Cavedo Manager Real Estate, Hospitality and Leisure Miami, FL Edwin Hendricks Principal Real Estate, Hospitality and Leisure Atlanta, GA Hospitality trends 14

16 EY Assurance Tax Transactions Advisory About EY EY is a global leader in assurance, tax, transaction and advisory services. The insights and quality services we deliver help build trust and confidence in the capital markets and in economies the world over. We develop outstanding leaders who team to deliver on our promises to all of our stakeholders. In so doing, we play a critical role in building a better working world for our people, for our clients and for our communities. EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information about our organization, please visit ey.com. Ernst & Young LLP is a client-serving member firm of Ernst & Young Global Limited operating in the US. About EY s Global Real Estate, Hospitality & Construction Sector Today s real estate sector must adopt new approaches to address regulatory requirements and financial risks while meeting the challenges of expanding globally and achieving sustainable growth. EY s Global Real Estate, Hospitality & Construction Sector brings together a worldwide team of professionals to help you succeed a team with deep technical experience in providing assurance, tax, transaction and advisory services. The Sector team works to anticipate market trends, identify their implications and develop points of view on relevant sector issues. Ultimately, this team enables us to help you meet your goals and compete more effectively EYGM Limited. All Rights Reserved US SCORE no US ED None This material has been prepared for general informational purposes only and is not intended to be relied upon as accounting, tax or other professional advice. Please refer to your advisors for specific advice. ey.com/hospitality